Getting approved for a home loan from a lender requires: reliable income, adequate assets for reserves, and a minimum credit score. These help prove to the lender that you can afford the mortgage payment, as well as your other monthly obligations.
There are two kinds of borrowers seeking a home loan. The first type is a W-2 wage earners who works for an employer and earns a stable salary twice a month or every two weeks. They also have no interest in any capacity in the company they represent. W-2 wage earners are usually much easier to qualify for financing than the other kind of borrower, a self-employed person. Individuals who work for themselves are either sole-proprietors or have an ownership interest in the business under an LLC, Corporation, and other business forms.
These documents complicate matters:
- Schedule C – Self-employed individuals rarely choose to overpay their taxes. Most simply tell their CPA or tax accountant to save them the most money they can on their tax returns by writing off numerous expenses. As a consequence, this usually affects how much you are able to afford on a home purchase or refinance when a mortgage is involved. The self-employed person then shows little taxable income, or worse income that is negative.
- Business Entity Losses – When the borrower has an interest in the company as an officer of a corporation or member of an LLC, and they’re paid a W-2 salary, it may be inadequate to qualify.
A solution to the low or negative income that is disclosed on personal and/or corporate tax returns, may be offset, by the following strategies:
- Hold off until next year – Depending on the degree of the amount of lost income, you may prefer to provide two years of income into a single year. This helps to balance out the averaging of two years used by lenders to calculate your income.
- Switching loan programs – This could mean changing from a mortgage with tax returns to a mortgage without tax returns which include one years’ worth of Bank Statements and even a Stated Income Loan. (See choices here).
- Reducing debt – Based on your financial profile, paying off or substantially reducing your debts is always a wise and beneficial strategy. Getting rid of a credit card at 19% interest with a payment at $350 per month may certainly help.
- Increase down payment – Another way is to put in a higher down payment to buy a home than you had planned. This is done to keep your debt to income ratios with fannie mae guidelines.
Before you do anything, get some advice from your tax professional if you have personal tax returns with losses. That way you’ll have a complete understanding directly from a tax professional. As soon as you are comfortable with what you need to do, speak with a lender to see how much you will qualify for to refinance or buy a home.